1. Letters of credit for import: A party wishing to import goods from a foreign country must—according to trade agreements—obtain a letter of credit in the importer’s country. By issuing a letter of credit, the issuing bank agrees—either through correspondence or by engaging the seller’s representative in the importer’s country—to pay the seller the amount agreed upon by both parties owing to the proforma invoice that was issued by the seller—containing a complete description of the goods, both in terms of quality and quantity—through a bank in the seller’s country, after the completion of the transaction.
The bank also charges the importer a fee, which is a percentage of the entire value of the requested goods, such as 10 or 20 percent.
The bank then informs the seller of the completion of the transaction, so that the seller may submit the shipping documents to the bank and acquire the payment for the goods. Upon acquiring the shipping documents which are in accordance with the description of the goods agreed upon at the time of issuing the letter of credit, the bank transfers the entire payment to the seller.
2. Letters of credit for export: If a party wishes to export a product to a foreign country, the importing party needs to—according to trade agreements—obtain a letter of credit from a bank in his country. Thereafter, when the aforementioned steps—outlined for issuing a letter of credit for import purposes—have been executed, the bank establishes a link with the exporter, and ensures that the product is delivered to the buyer and the payment is delivered to the seller.
Therefore the process for issuing a letter of credit for importing and exporting purposes is the same.
Sometimes the exporter, its representative or deputy presents documents describing the type, quality, quantity and other specifications of the goods to the bank without a prior agreement with an importer, and deputizes the bank to present those documents to potential buyers. Thereafter, should a buyer accept to buy the goods at the specified price, he will request for a letter of credit. The bank then goes through the process of ensuring the delivery of the product to the buyer and the payment to the seller as elaborated above.
The matter of issuing a letter of credit and taking payment for it can—from the view of the shari’a—occur as an instance of various headings, of which three are mentioned below:
1. It can be an instance of hiring, wherein the applicant hires the issuing bank to issue a letter of credit, and considers the sum paid to the bank—which is a specific percentage of the value of the imported goods, as agreed upon by the bank and the applicant—as hiring wages.
2. It can also be an instance of ju‘¡lah, wherein the applicant comes to an agreement with the bank that, should the bank issue a letter of credit to him, he will pay a specific amount to the bank. Hence, once the bank has issued the letter of credit, it reserves the right to acquire that sum from the applicant.
3. It can also be an instance of a sale, wherein the bank pays the requested amount to the seller in the seller’s local currency according to the foreign exchange rate. In return the issuing bank acquires payment for it from the applicant and the buyer in their local currency. It then sells the foreign currency that it bought on behalf of the importer, along with the profit (to the importer), and since the trade of money for money involves two different currencies, there is no problem in it.